Is Robust R&D The Secret To Google's Success?

Shares in Google (GOOG) are, for the most part, maintaining a steady, upward trend in line with the movement of the technology sector as a whole. Shares closed at an all-time high of $915.89 on May 15th of this year, a gain that represents a 30% YTD jump in stock value. Compare this to the Technology Sector Select SPDR ETF (XLK), the most liquid of technology ETFs, which has produced a less-impressive 5.35% YTD yield. GOOG has since slipped back to the $870-$875 range, but even this value represents a 22-24% YTD increase in value. The myriad reasons behind Google's unprecedented successes can be boiled down to one point: it has innovated while competitors' R&D departments have gone dark.

The Mountain View, CA, based tech giant has not been without its fair share of growing pains, but its attempts to diversify beyond its core search engine business have finally found a firm foothold, especially in mobile technologies. Google's acquisition of Android, Inc. in 2005 has, partially due to Apple's (AAPL) unofficial hiatus, allowed Google to build a mobile enterprise that credibly signals an ability to dominate mobile OS and app markets. As of the end of the first quarter of this year, a report from Kantar Worldwide Comtech shows Android as holding an average 64.5% of the smartphone purchases in the 10 surveyed nations. This report suffers from a potential conflict of interest, however, as Kantar is a subsidiary of a company which has marketing deals with both Windows and Samsung. comScore's recent report on various mobile providers' market shares provides a view free of this potential bias, and still places Google's Android platform above the competition with 52% of U.S. market share as compared to Apple's iOS, which possessed 39% as of March 2013.

Google's participation in the tablet market had been decidedly weaker. The Apple iPad for some time held dominion over the tablet market, and it seemed at times that the iPad was completely unassailable. Unfortunately for Apple, it offered competitors an invaluable lifeline with its profligacy in the post-Jobs era. Android tablet makers have seen improvements in market share to the tune of a 247.5% year-over-year growth in tablet shipments as of the 1st quarter of 2013. Evidence suggests that the low price points of Android products has made them increasingly popular in emerging economies, which represent a massive and largely untapped mobile market.

Google's mobile OS dominance is not without its drawbacks, however, as Google faces an uphill battle to monetize its software and apps to the extent that Apple has done. Google manages comparatively lower margins on mobile sales to the point that Apple is actually reaping a significantly larger profit on much lower market share. Google's hardware revenue stemming from the acquisition of Motorola Mobile has fallen far short of Street expectations, coming in at $1.02 billion as opposed to the $1.3-$1.4 billion projected by analysts as reported by Barron's. Low margins are not only the problem in mobile hardware - the issue of profit generation has plagued Google's other acquisitions as well.

The acquisition of YouTube is possibly the strongest growth play of the many Google has made. YouTube has a massive and constantly growing user base, recently announcing that it had more than 1 billion unique visitors every month. Despite this incredible number, Google manages to pull only a paltry sum from this source at this time. This does not mean that Google is incapable of monetizing the world's streaming video leader, only that it has yet to find a way to do so without agitating the user base. According to AdAge, Google will soon commence an effort to capitalize on its prodigal acquisition by offering paid subscriptions to premium content channels. These channels will be offered at rates as low as $1-$5 per month, and may be offered up as soon as the second quarter of this year. Given the size of YouTube's user base, even these small amounts, if properly promoted and serviced, could result in large yields and encourage Google to expand further into the premium content market.

These expansions aptly exhibit the capacity for economic value creation that makes GOOG so appealing to investors. It is rare in the present times for a company to be so cavalier in research and development and other spending. Others seem unsure of themselves and the mounting economic recovery, and Google is more than willing to pick up the slack. This caution has led to stockpiled cash reserves and slumping growth patterns even for a company so universally adored as Apple, and may hamstring these other titans in the long-term as, if they do not act soon, they will find themselves playing catch-up on multiple fronts. In the meantime, investors seem assured that Google will continue its ambitious charge to the top of the tech world.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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